Social Currency: Facebook's Upcoming Credit System

Everyone's been wondering what the Facebook's business model will be. Despite assumptions that the website will rely on advertising, the social networking site is hard at work developing a virtual currency system that will involve real dollars, and hence real revenue for Facebook.

The idea is that 10 Facebook credits would cost a dollar, and users could buy them or get them from advertisers. Those credits could be traded among users or used to buy applications. Facebook is now testing the system with a couple of applications, and we should hear more about it in the next few weeks.

Investor Spring Cleaning - A CNBC Special Report

These credits would work in a few ways. One, users could give credits with comments to their friends. If someone posted an insanely funny status update, give him or her five credits. Show your support for causes by giving credits. (We'll have to see if people like the idea of rewarding friends with virtual currency). How do you get those credits? Advertisers can include credits as part of an ad campaign. If Mars is pushing a new candy bar, it can give you virtual candy bars, plus credits to share with your friends. (This makes sense to me, especially since advertisers are so eager to tap into social networks to drive sales).

The third, potentially most profitable use of credits: if you want to buy an application, like an online game from a developer, instead of paying $2, you'd pay 20 credits. Apple makes a pretty penny from its cut of all the applications sold for its iPhone, and this could be similar. Games, which are incredibly popular on Facebook, are the natural target.

I think if Facebook can get people to save credit card information on the site, it'll yield huge returns. Facebook users will have to trust the site with their credit card information, the way they now trust iTunes. But once the information is safe and secure, think about the potential! People don't think twice before ordering a 99 cent song on iTunes. If you procrastinate endlessly at work by playing games on Facebook, you wouldn't think twice about paying 99 cents for a new game. Take into account the fact that Facebook has more than 200 million active users; that scale could mean something.

Plus, if people spend more and more time on Facebook, they could start buying much more than just virtual goods. If a friend recommends a dress to me through Facebook, I could buy it through the website and the social network could get a cut. A friend could recommend a song, and I could click to buy it through iTunes, and Facebook could pull a few pennies from that. That could eventually ad up. Now Facebook just needs to develop a secure, reliable system. I think calling the currency credits instead of dollars is odd. It's probably designed to keep people from feeling weird about paying their friends. But if Facebook is going to build this out to its full potential, I bet the site will deal in real money and real products. People like making purchasing decisions based on the recommendations of friends, which could be huge for Facebook.